Yahoo Finance We Like These Underlying Return On Capital Trends At Leon's Furniture (TSE:LNF)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Leon's Furniture (TSE:LNF) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Leon's Furniture:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = CA$289m ÷ (CA$2.5b - CA$1.0b) (Based on the trailing twelve months to September 2021).
So, Leon's Furniture has an ROCE of 20%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 18%.
View our latest analysis for Leon's Furniture
In the above chart we have measured Leon's Furniture's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
Leon's Furniture is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 57% more capital is being employed now too. So we're very much inspired by what we're seeing at Leon's Furniture thanks to its ability to profitably reinvest capital.
On a side note, Leon's Furniture's current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Leon's Furniture has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.
Like most companies, Leon's Furniture does come with some risks, and we've found 1 warning sign that you should be aware of.
While Leon's Furniture may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
